Blue Nile Blues

June 1, 2007byRob Bates

Ijewelry.com? Dead. Firstjewelry.com? Dead as well. Miadora, Adornis—so many online jewelry retailers are but a memory.

And for a moment, it seemed that Blue Nile was destined for the same dot-com dustbin. But today, the Seattle-based e-tailer hasn’t merely survived, it’s thrived. In 2006 it racked up $250 million in sales and could hit between $290 and $300 million in 2007. Those are striking numbers for a company that’s been around for only eight years.

Unlike past mass market competitors, Blue Nile scares independent jewelers because it sells high-end items. Its $5,600 average price for an engagement ring far exceeds the national average of $3,200. In an interview with National Public Radio last year, chief executive officer Mark Vadon identified the company’s competitors as Tiffany and independent jewelers. (Blue Nile turned down JCK‘s request for an interview.)

“Our biggest competition is all the local jewelers throughout the country,” Vadon told NPR. “In every town there’s a local high-end jeweler who has been there for many, many years, and that’s who we’ve been taking market share from.”

And it doesn’t plan to stop. While its core business is engagement rings, it has beefed up its fashion jewelry offerings in a bid to attract more women shoppers. And Vadon recently told an investment conference that he thinks the company can eventually sell $1 billion domestically. Granted, eventually can be a long time, and he was speaking at an investment conference, but by way of comparison, Tiffany in 2006 sold $1.3 billion in the United States. Clearly, Blue Nile wants to be a major player.

“After customers get their engagement ring, we want to make sure they come back for their wedding bands, wedding day gifts for their groomsmen, and just lock in that customer for the next 50 years,” Vadon told NPR. “We want to be their jewelers for life.”

These are fighting words to independent jewelers—who don’t want customers looking at a faraway dot-com as their “jeweler for life.”

But, as even many independents warily admit, Blue Nile does have certain attractions for consumers, particularly the following:

Low prices While Blue Nile admits that other sites sell for less online, it also boasts its prices are 30 percent lower than those of a retail jewelry store. In the first quarter of 2006, faced with slowing growth, it made its prices more “aggressive” (read: lower). Margins took a hit—overall they were 20.6 percent, compared with last year’s 22 percent—but sales shot up 24 percent over the previous year’s figures. (No price reductions are planned for the future, management says.)

Vadon says his price advantage is even greater with larger stones. “We are one of the biggest buyers of diamonds in the world, so we buy at very low cost,” he told investors in a conference call. “When you look at a $100,000-plus diamond, we are running on single-digit margins, high-single-digit margins, so stores just cannot compete with us. Even if they want to compete with us on that type of product, they literally in many cases have to pay more for the diamond than we are willing to sell it to the consumer for.”

Finally, Blue Nile has one more significant price advantage over brick-and-mortar stores: As an online seller, it doesn’t have to charge sales tax.

Low pressure “For many people, just having a salesperson in a retail store help them is perceived as pressure,” argues Edward Weller, managing director of ThinkEquity Partners, San Francisco. “That’s a benefit all Web sites have—they don’t have that perception.”

Of course, many engagement ring buyers do want help with such an important purchase. For them, Blue Nile has customer service reps they can call, and half of the company’s engagement ring customers take advantage.

Vadon notes its customer service reps are not on commission and have no stake in whether or not a customer buys. “We think that has resulted in a far superior consumer experience,” he told the conference call.

“Their phone people are very good,” agrees Weller. “Call them up, and give them a hard time. They won’t get mad at you.”

Low overhead Newly appointed president Diane Irvine told the investment conference that Blue Nile has “a very lean cost structure; that’s why we can sell at the margins that we do.”

At present, Blue Nile lists around $14 million in inventory—out of more than 10 times that in sales—and most of that is likely mountings. Its diamonds are mostly held by wholesalers, who ship to Blue Nile’s headquarters when an order is made. “Jewelry is a typical asset-intensive business, but we have switched that around,” Vadon told the investors.

Solid education Like many independent jewelers, Blue Nile stresses education; atop its site are the words “education, guidance, diamonds and fine jewelry.” Its educational pages have proven popular with its young clientele, according to Vadon and Irvine, who note most users typically read up on basics before they buy.

Fast service Even though it owns little of what it sells, the company emphasizes speed. After an order is placed, a diamond is shipped from the wholesaler to the company. From there, the company’s jewelers take a day to make it into a ring. Then it’s shipped via overnight Fed Ex to the customer. Total time from order to arrival is three days. “Faster, easier, and cheaper always wins in retailing, and usually any two will do,” says Weller. “Blue Nile seems to be all three things.”

Despite these advantages, jewelers should not panic, analysts say. “There is competition from the Internet, but not to the disproportionate degree that everyone makes it out to be,” says Kate Petersen, CEO of Performance Concepts, which does consulting for the jewelry industry. “Retailers are quick to point fingers and say the Internet is going to be the doom of our industry. Only if you let it, will it be.”

Petersen argues that the Internet is just another competitor. “Retailers remember the one customer that came in and ended up buying online. But what about the other 30 who bought from other stores?” she asks.

Petersen says there are two kinds of shoppers, those who shop for convenience and those who want to deal with a person. “The serious convenience shoppers you don’t even see in the store,” she says. “But there is still a huge proportion of people who want to buy from a person.”

Even talking over the phone with a customer service person is no match for a face-to-face consultation, argues analyst Ben Janowski. “A jeweler can say this is what fits in your budget, this is what is right for you, on a real one-on-one level,” Janowski says. “You can look at one stone versus another and discuss the characteristics of each.”

In addition, even though Blue Nile is an established name, it does not have the cachet or romance of many local jewelers.

But that doesn’t mean jewelers shouldn’t rise to its challenge. Analysts argue that jewelers have to match some of the Internet’s competitive advantages—even, sometimes, on price. “The days of keystone are over,” says Janowski. “You have to be competitive in diamonds. I know a retailer who looks up stones on the Internet and tries to sell under Blue Nile. He just feels if that’s the competition, that’s what he has to do. And he sells a lot more than just diamonds. It’s the Wal-Mart approach—raising your volume and lowering your margin.”

Andrew Johnson, of the Johnson Family Diamond Cellar in Columbus, Ohio, says that while there is a benefit to the in-person buying experience, it has to fall within what he calls a reasonable price differential. “If you are 40 percent higher, people are just going to forgo the experience,” he says.

Petersen also advises retailers to be competitive with online retailers’ service policies—particularly money-back guarantees (30 days, in Blue Nile’s case).

Jewelers also need to stress the factors that make buying from them different from buying on the Internet. “Customers don’t come into a store expecting the same prices as online,” Petersen says. “But they want to know, if I buy from you, what do I get that makes it worth more?”

If the answer is service, Petersen argues, that service has to be tip-top. “We still live in an industry where the typical response of the salesperson when confronted with an issue is: ‘I can’t do anything with this right now. I have to send it to the manufacturer for an estimate,’” she notes. “If you tell a customer that buying from you offers the opportunity for on-site service, don’t turn around and say it’s going to take two weeks to repair things. When a customer has a problem, they want it fixed right away.”

Retailers like Gary Gordon, of Samuel Gordon Jewelers in Oklahoma City, who was recently quoted in a New York Times story about Blue Nile, say they have gotten the message. “We have to give customers the ultimate brick-and-mortar experience,” he says. “People talk about giving a great brick-and-mortar experience all the time, but now we retailers really have to do it for our survival.”

Gordon today stresses having customers choose their diamonds in the store. “We tell them by buying from us they can get the pick of the litter,” he says.

He also stocks a larger variety of mountings and has lowered margins. And his educational presentation has been revamped to better incorporate the customer standing in front of him. “We make it more of an artistic presentation than a scientific presentation,” Gordon says. “We talk about benefits rather than features. Beauty is indescribable on the Internet.”

Mark Moeller, of Minneapolis jeweler R.F. Moeller, also quoted in the Times story, says that when someone brings in a list of prices from a site like Blue Nile, he tells the customer “give me your credit card and I’ll match everything. You know how many people have handed over their credit card? None. So then I say, ‘OK. Now we’ve established that it is worth something to do business with me, let’s figure out what we need to do.’”

And that usually means talking about the services his store offers. “We have a lifetime exchange policy and a very liberal policy,” he says. “We do setting, sizing, appraising, follow-up appraisals, you name it. We tell people, ‘Don’t be embarrassed coming in the door. We are happy to check your diamond.’ We rely more on the relationship with the client than the transaction.”

He does admit that Blue Nile has caused him to trim margins. But the store is also more focused on differentiated products, like high-end brands Lazare and Hearts On Fire, which are less vulnerable to comparison shopping. And his salespeople have honed their skills. “You have to be a better salesperson today,” he says. “You can’t be a clerk. The only way to do business today is to have a great relationship with your client. When people walk into a store, we make them comfortable, we offer them wine or a cup of coffee. We don’t try to sell them immediately. We try to find out something about them, who they are, what they are looking at for. That can’t happen at Blue Nile.”

He continues, “Do I lose a sale or two to Blue Nile? I’d be naive to say I don’t. But it comes up in maybe one out of 20 presentations. I’ve had four Jared, three Ben Bridge, and one Tiffany come into my market in my last few years, so Blue Nile is way down in the list of worries. We have lived through this cycle before, where everyone thought the discounter would put the retailer out of business, or TV is going to put us out business. If you are smart and know what you are doing, things like Blue Nile give you a competitive edge.”

Finally, if jewelers want to beat Blue Nile, they have to compete with it—on the Internet. “Look at Blue Nile, look at how much they have invested in their site,” Petersen says. “Retailers need a site that is user-friendly, easy to manage, and has good photography—some of the photography I’ve seen on retailer Web sites would make your head spin.”

Because in the final analysis, the Internet is here to stay—and so is Blue Nile.

“In terms of diamonds, this is still in its infancy,” Janowski says. “We are now moving into the Millennials, the next generation, and they have zero resistance to using the Internet to buy anything they want. In the next 15 years, they will become the force.”

“I know retailers who have told me flat out, I’m still struggling with how to deal with this,” Janowski says. “And they eventually have to come up with an answer.”